Many people have a misunderstanding of financial knowledge and think that only financial professionals should master it. It doesn't seem to matter that other employees, entrepreneurs and entrepreneurs don't know anything about finance.

In fact, this is not the case at all.

Finance is a language that every business person must master.

Finance is to business what law is to politics.

Many presidents have studied law. Because if you want to understand politics, you must first understand the law.

If we say that law is the language of politics. Then finance is the language of business.

With an understanding of finance, you can thoroughly understand a lot of the basic logic of business.

1、Revenue, profit, cash flow

Finance is the language of business. To understand the language, we have to start with some key words.

First of all, the most basic set of words in the financial language isRevenue, profit, and cash flow。

Teacher Yan Jing said: profit is the quality of income, and cash flow is the quality of profit.

What does it mean?

If you ask an entrepreneur, how is your company's revenue this year? He replied, I probably sold more than 500 million this year, and more than 300 million last year.

You said, wow, that's good. You've gone up a lot this year. How much money did you make this year?

He replied that the profit is about the same as last year, with more than 50 million last year and more than 60 million this year.

You see, although his income has increased by 200 million, his profit has only increased by 10 million. Profits do not increase linearly with income.

This shows that the quality of his income this year is actually not as good as that of last year.

Profit is the quality of income.

If you look at the annual Forbes World 500s list, ranked by income, the first place for a long time is Walmart Inc.

But in fact, people are not most concerned about income ranking. What are you most concerned about?

Focus on market capitalization.

The company with the highest market capitalization today is Apple Inc.

Market capitalization comes from profits.

Although Apple Inc's income is not as good as Walmart Inc's, his profit is much higher than Walmart Inc's.

Therefore, profit is the quality of income.

You then asked the entrepreneur at the beginning, you made a profit of 60 million this year, did you give a bonus to your employees?

He replied, not yet. Because although the profit is 60 million, there is no money in the account. The customer's payment hasn't been called to me yet, and all the cash in the account has been restocked.

You see, although he has a profit of more than 60 million in the financial statements, there is actually no cash flow in his account.

Even though he has made so much profit on the book, the profit has not yet been turned into cash into his account, and he will not be able to use it for the time being.

Profits are book-based and man-made. And the cash flow is real, it needs to be accounted for and released.

The relationship between profit and cash flow is like the relationship between social science and natural science.

Natural science exists objectively, while social science needs to be interpreted artificially.

Only the cash flow that has been accounted for is your real profit.

Otherwise, profit is just a figure in the income statement.

Looking at the income statement can help us to see whether the business is profitable or not.

But at the same time, we also have to look at cash flow, which can help us to see whether the profits have been accounted for or not.

Remember, profit is the quality of income. Cash flow is the quality of profits.

When we look at a company, we should observe not only its revenue, but also its profits and cash flow.

Income represents the size of the market, profit represents the space to make money, and cash flow represents the ability to bear risks.

Only when these three indicators are healthy can the company develop in the long run.

2、Assets and liabilities

The second group of words in the financial language, let's talk aboutAssets and liabilities。

What is an asset? What is debt?

Assets, including cash and cash equivalents, accounts receivable, inventory, and fixed assets.

What about debt?

Liabilities, including advance receipts, accounts payable, loans (including bank loans, etc.), and shareholders' equity.

Why are shareholders' equity counted as liabilities?

Because the word debt is translated by the English liability, more accurately, it should be translated as "responsibility".

Since the shareholders have invested in you, then you have the responsibility to make money for the shareholders, which is a kind of liability (liability).

With regard to assets and liabilities (liability), let me give you a specific example.

If you open a snack bar, what assets do you have?

There are some in your account.CashOh, this is your asset.

Lao Wang next door often comes to you to drink beer and agrees to pay you on credit first, and he will pay back his salary at the end of the month. This is a stroke.Accounts receivableThis money belongs to you in terms of responsibility. This is your asset.

A large quantity of goods in your commissary can be sold for tens of thousands of yuan.InventoryOh, it's your asset.

The house of the commissary is handed down in your family. It is yours.Fixed assetsYou can also sell it for money, which is also your asset.

Cash, accounts receivable, inventory, fixed assets, they are all your assets.

Among them, selling houses (fixed assets) is the most difficult. It's not easy to sell stock, but it's not as difficult as selling a house. It is easier to collect accounts receivable. The cash in the account can be used as soon as you take it out.

Therefore, the liquidity of fixed assets, inventory, accounts receivable and cash increases in turn.

These are assets.

What kind of debt do you have?

Lao Wang's son next door will come to you for snacks every day after school, so Lao Wang saved 500 yuan in advance for his son to eat whatever he wanted.

This 500 yuan, that isAdvance paymentBecause you haven't fully cashed the same amount of snacks to Lao Wang's son, so this is your debt.

You entered a candy company this month, and you agreed with the candy company that you would pay after a month. This money is yours.Accounts payableOh, this is your debt.

When you opened the shop, you borrowed 20,000 yuan from your relatives.Borrow moneyIn the future, you will have to pay him back with interest. This is your debt.

At the same time, your mother invested 50,000 yuan in you when you opened the shop. This 50,000 yuan is not yours, but your mother's. Your mother is your shareholder. You have a responsibility to help your mother earn at least 8% a year.

Otherwise, why would she invest in you?

If the money in the bank can earn 8% a year, now she has invested in you, if you do not help her earn 8% back, then you are dereliction of duty.

This isShareholders' rights and interestsOh, this is also your debt.

Prepayments, accounts payable, loans (including bank loans, etc.), and shareholders' equity are all your liabilities.

Knowing what assets and liabilities are, you can thoroughly understand what are your assets and can be realized, and what are your liabilities and should never be spent.

For example, barber shop stored value card, shared bike deposit, these are debts.

You must not spend this money.

Otherwise, once the management is not good, it will be like ofo, even the user's deposit will not be paid.

3、Operators, creditors, shareholders

The third group of words in the financial language, let's talk aboutOperators, creditors, and shareholders。

Many entrepreneurs are indistinguishable from these three concepts.

Because many people start out with their own money to start a business, he is both a shareholder and an operator.

After starting a business for a period of time, I find that there is not enough money, what should I do?

He sold his house and the money went directly to the company. The money was not counted as a stake and was borrowed by shareholders in the accounts.

At this time, he himself became a creditor of his own company.

So what exactly are operators, creditors, and shareholders? What's the difference between them?

To put it simply, the operator is the person who runs the company, who is responsible for creating value.

Creditors and shareholders are both investors, and the difference is that they have different requirements for risk and return.

The risk of the creditor is small, but the return is small, while the risk of the shareholder is very big, but the return is also bigger.

Let me give you an example.

If your friend wants to open a restaurant and he asks you to borrow 1 million yuan, you are willing to give 1 million yuan to help him.

Then you have two choices.

First, lend him 1 million directly and charge interest, such as an annualized 10%.

At the same time, he put his house property certificate with you for mortgage.

At this point, you are his creditor.

Because you took his property certificate as a mortgage, if he does not pay the money, you can sell his house, so your risk is very small.

But correspondingly, your income is also fixed, 10% annualized, not very high.

Another option, you think his restaurant is very promising, how can you earn 30% a year, then you can invest in him, 1 million shares.

At this time, you are his shareholder.

If the business of this restaurant is really good, you can get a big share of the profit. The better the business, the higher your income.

But correspondingly, if this restaurant closes down, you will lose your 1 million yuan.

Therefore, creditors and shareholders actually belong to investors.

It is just that the risk of the creditor is small, but the return is small, while the risk of the shareholder is very big, but the return is also bigger.

Operators, creditors, shareholders, you should know how to distinguish between these three roles and understand their respective functions.

4、Profit margin, return on investment

The fourth group of words in the financial language, let's talk aboutProfit margin and return on investment。

What is the profit margin? What is the return on investment?

Aren't they a concept?

Actually, not at all.

Profit margin = profit / sales.

The profit margin is 10%, which means that for every 100 yuan sold, you can get a profit of 10 yuan.

There is no concept of investment.

The rate of return on investment is profit / total investment.

There is a concept of investment in it.

For example, if you make a shoe factory, you sell 10 million shoes a year, the profit margin is 10%, and you make a profit of 1 million. It sounds great.

How much is the investment in your shoe factory?

In fact, your shoe factory has invested 100 million.

Then you have made a profit of 1 million this year, and your return on investment is 1 million / 100m = 1 per cent.

The profit margin is 10%, which sounds OK.

But the return on investment is only 1%, which is actually very uneconomical.

Investors might as well buy financial management, which is higher than 1%.

Therefore, profit margin and return on investment are not the same concept at all.

Many people only focus on profit margins and how much money they earn each year, but they don't pay attention to the return on investment or even know the return on investment.

But in fact, the return on investment is the index to measure the level of operation of a company.

So why do many people focus only on profit margins and not on return on investment?

Because they don't know there's a key link in it.

That is, the turnover rate.

What is the turnover rate?

Turnover = sales / total investment.

Do you remember the profit margin you just said?

Profit margin = profit / sales.

If you multiply the turnover on both sides of the equal sign at the same time, what do you get?

Profit margin * turnover = (profit / sales) * (sales / total investment) = profit / total investment = return on investment.

Profit margin * turnover is actually the return on investment.

Therefore, to measure the operating level of a company, there are actually two key intermediate indicators.

One is called profit margin, and the other is called turnover.

Many companies only focus on profit margins, but not on turnover.

You can understand the turnover rate as the efficiency of the use of funds.

Let me give you an example.

You opened a snack bar, put a toy on the counter, and never sold it.

A year later, someone finally bought it.

Well, the annual turnover rate of this toy is once.

It took 12 months to sell the toy.

If the gross profit of this toy is particularly high, 50% of the toy is purchased for 50 yuan, and you sell it for 100 yuan.

So on this toy, you made 50 yuan a year. You think it's not bad.

At the same time, JD.com also has this toy.

JD.com 's purchase price is also 50 yuan, but it only buys 60 yuan.

So its gross margin is about 16.7%.

But JD.com 's annual turnover rate is 10 times.

This means that it takes the same 50 yuan to sell the toy, and it has been sold 10 times a year.

It made a total of 10, 10, 100 yuan.

It sells cheaper than you, has a lower gross profit, but earns more than you. In the end, his return on investment is higher than yours.

It is because of its high turnover rate that it uses funds more efficiently.

So, you have to understand that profit margins are not the only important indicator.

There is also a very important indicator, called turnover.

Profit margin and turnover rate determine a company's return on investment.

The return on investment is the index to measure the level of operation of a company.

5. Business cycle, inventory cycle, cash cycle

The fifth group of words in the financial language, let's talk aboutBusiness cycle, inventory cycle and cash cycle。

Many people have not even heard of this set of concepts, but they are a very important set of concepts in the business world.

Understanding the business cycle and cash cycle will take your understanding of business to a whole new level.

So what is the business cycle? What is the inventory cycle and cash cycle?

Let me give you an example.

You opened a snack bar and bought a toy from an upstream supplier. You told him that you would pay him in a month.

Then you put the toy on the shelf. A month and a half later, Lao Wang next door bought the toy for his son.

But he said, this toy is too expensive. Can I pay you after I get paid a month later?

You thought about it and said yes. We've been neighbors for so long, so let's give him credit for a month.

Let's straighten out the timeline.

You buy from the upstream supplier, put the toys on the shelf, and a month later, you pay the upstream supplier.

Pay the upstream supplier, and half a month later, Lao Wang took the toy away.

After another month, Lao Wang paid his salary, and he paid you for the toys.

Therefore, it took you a total of two and a half months to get the goods from the upstream to the time you received the payment from Lao Wang.

These two and a half months are called the business cycle.

The business cycle is the time it takes for you to get the goods from upstream to receive payment for the goods.

So what is the inventory cycle?

From the time you put the toy on the shelf to the month and a half when Lao Wang took the toy away, it is called the inventory cycle.

The inventory cycle is the time it takes for you to get the goods from upstream to deliver them to the buyer.

In other words, the inventory cycle is the time for the goods to stay in your hands.

So what is the cash cycle?

You pay for the goods upstream, and after half a month, Lao Wang takes the goods away, and after another month, Lao Wang pays you the money. This month and a half is the cash cycle.

The cash cycle is the time it takes from the time you pay the money upstream to the time it takes you to receive the buyer's payment.

In other words, the cash cycle is the time when your money is occupied.

Let me give you another example.

JD.com 's average inventory cycle is 38 days.

In other words, it only takes an average of 38 days for JD.com to get the goods from upstream to sell them to you.

And when you buy things on JD.com, you pay money on one hand and deliver the goods on the other. If you pay, JD.com will deliver the goods to you immediately.

Therefore, JD.com 's average business cycle (from getting the goods upstream to receiving the buyer's money) is also 38 days.

When will JD.com pay the upstream?

The account period for JD.com to pay upstream is 60 days.

In other words, JD.com will pay the upstream only on the 60th day after he gets the goods from the upstream.

However, JD.com 's business cycle is 38 days.

In other words, on the 38th day after JD.com got the goods from the upstream, he had already sold the goods and received payment from the buyer.

Therefore, JD.com 's cash cycle is 38-60 =-22 days.

In other words, JD.com received the payment from the buyer and will not pay the money to the upstream until 22 days later.

This means that JD.com did not spend his own money to restock at all.

JD.com first took the goods from the upstream, then sold the goods to receive the money, and then 22 days later, he gave the money to the upstream.

Equivalent to these 22 days of money, JD.com can actually be used in vain, even if put in the bank there is interest.

This is the secret of JD.com making money.

In fact, the secret of the retail industry has never been in the commodity price difference, but in the cash cycle.

In the retail industry, the average cash cycle is-24 days.

In other words, the entire retail industry is not actually spending its own money, but is spending buyers' money and playing cash games. So the more you sell, the more money you get.

Retail business, because the sales link is to pay money and delivery, and the purchase link of the payment period is very long, so it is possible to achieve a negative cash cycle.

Is there a business in the world where, contrary to the retail business, the purchase link pays the money and delivers the goods, while the payment period of the sale link is very long?

There are, too.

Bulk trade, such as plastics.

China Petroleum & Chemical Corp upstream is very strong, the purchase must be settled in cash, one hand to pay and the other to deliver.

The downstream customer General Electric Co is also very strong and wants you to have an account period of 60 days. He won't pay you until you deliver the goods for 60 days.

At this time, your cash cycle = inventory cycle + 60 days.

You'll need to advance your own money for a few months.

So the secret of bulk trade is your cost of capital.

Understanding this logic, when you do pricing, you can not only consider the production and operating costs, but also consider the cost of capital.

Many bosses said that I bought this thing cheaply and sold it at a profit, but why did I lose money in the end?

Because he didn't take into account the cost of capital.

The lower your cost of capital, the more comfortable you will be in bulk trade.

Retail and bulk trade are two very different kinds of business.

If you don't understand this logic, you have no idea how you made your money.

It's only luck that you can make money at this time.

Sooner or later, the money earned by luck will be lost by strength.

Only when you have a thorough understanding of the business cycle, inventory cycle and cash cycle can you understand the nature and secrets of these industries.

6、Fixed cost, variable cost

The sixth group of words in the financial language, let's talk aboutFixed cost and variable cost。

What is a fixed cost? What is the variable cost?

Fixed costs are the costs that you have to pay every month, with or without income.

Such as rent, such as employee wages.

Variable cost is the cost that changes with income.

Such as restocking, such as sales commission. Like advertising fees.

When you don't sell, you don't restock and you don't have to pay a sales commission.

Fixed costs and variable costs add up to all the costs of running your business.

In each industry, the proportion of fixed cost and variable cost is different.

When the economy is developing normally, you may not feel the difference between fixed costs and variable costs.

Anyway, it is the cost, as long as the total income is greater than the total cost, you can make money.

However, once you encounter an emergency (such as the COVID-19 epidemic) and your income stops suddenly, if your fixed cost share is too high, then the risk will be great.

Therefore, in order to enhance the risk resistance of the enterprise, you can change the fixed cost to the variable cost.

How do you do it exactly?

For example, outsource some business.

Let me give you an example.

When an e-commerce like JD.com opens to seventh-and eighth-tier cities, it needs to consider the problem of logistics.

If we build our own logistics system, we need to maintain a large number of personnel, warehouses, vehicles and so on, which are fixed costs.

However, if the logistics business is outsourced to other express companies, then this part of the cost will become a variable cost.

If there is a business, there will be a logistics cost. Without business, there will be no logistics costs.

Whether it is a fixed cost or a variable cost, it needs to consider the size of the business.

This is not to say that variable costs are necessarily cheaper, but when your business volume falls short, choose outsourcing and change fixed costs into variable costs, your costs will be lower and your risk tolerance will be stronger.

For the manufacturing industry, in a special period, not every mold and parts have to build their own workshop to produce, you can choose outsourcing processing, or even external procurement, to turn these fixed costs into variable costs.

When business is good, people are not sensitive to fixed costs and variable costs. They always think that what I can do is done by myself. Why should I outsource and let others earn my money?

But in the event of an emergency, you will find that if you do everything yourself, the proportion of fixed costs will be too high.

At this time, the weaker your ability to resist risks.

Therefore, we must manage the fixed cost well to increase our anti-risk ability.

When there is a crisis in the future, it will be more leisurely.

The last words

This article is very long, but I hope you must finish it.

Not only to read it, but also to watch it many times, really understand it, and use these financial thinking in normal thinking.

Finance is like the X-ray of business, through which you can see through a lot of the basic logic of business.

As a businessman, you must know how to look at financial X-rays.

Just like in a hospital, although the person who makes the film is the X-ray room, the person who knows how to watch the film is actually the doctor who treats the disease.

The same is true in enterprises.

Although it is the financial personnel who make the financial statements, the people who should understand the financial statements most should be the managers of the enterprise.

Because every industry has its own secrets.

If you don't know these secrets, you won't be in the industry for many years.

And these secrets, sometimes you have to have financial thinking, you can understand.

Finally, we would like to thank teacher Yan Jing for bringing us such wonderful content.

I hope you can master the advanced language of finance as soon as possible, and use it to see through the business world and master the secrets of the industry.